Fitch Downgrades Midland Lutheran College, NE's Revs to 'B'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded $18.54 million of education facility revenue bonds issued by the Nebraska Educational Finance Authority on behalf of Midland Lutheran College (Midland) to 'B' from 'BB'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The downgrade reflects Midland's inability to correct the systemic mismatch of revenues and expenses that has driven a history of highly negative operating performance and a critical depletion of financial resources.

--The college's outstanding debt results in a highly leveraged position, which has been further burdened by short-term borrowing to support operations in recent years.

--Midland was able to turn around annual enrollment losses that have hindered the college's operating flexibility in fall 2010 as a result of an influx of students transferring from nearby Dana College, which closed its doors in July 2010.

--The college's senior management team, which experienced significant turnover at the vice president level in the past three years, received a new president in March 2010 who has initiated a three-year turnaround plan to address the financial and enrollment issues that the college faces.

KEY RATING DRIVERS:

--The successful implementation of management's three-year financial turnaround plan.

--The ability to sustain enrollment gains realized in fall 2010 through newly implemented, rigorous recruitment practices.

SECURITY:

The bonds are a general obligation of the college, additionally secured by a cash funded debt service reserve.

CREDIT SUMMARY:

The rating downgrade to 'B' from 'BB' reflects the critical depletion of Midland's available funds, defined by Fitch as cash and investments not permanently restricted, caused by a long history of significantly negative operating performance and subsequent heavy reliance on its unrestricted financial resources. The college's operating margin (prior to any endowment support) averaged negative 26.8% over the past five years. As a result of the systemic mismatch between revenues and expenses that has gone uncorrected, the college has completely exhausted its available funds, which dipped to negative levels in fiscal 2009. In fiscal 2010, the board authorized the college to borrow up to $2.5 million against its permanently restricted endowment, a sign of severe financial duress. In addition, the college is actively seeking to have restrictions on endowment funds waived in order to regain some level of financial flexibility during its planned recovery period.

The college's fundamental lack of financial flexibility has been exacerbated by enrollment declines in each year from fall 2006 to fall 2009. In fall 2010, the trends were reversed with a sharp increase of 51.7% in total enrollment. The improvement is attributable, for the most part, to Midland's efforts to enroll students from nearby Dana College, which ceased operations in July 2010. In total, the college enrolled 320 students who planned to study at Dana College. In addition to accepting transfer students, Midland also absorbed two successful sports programs from Dana College - bowling and wrestling - which were not offered previously. The college expects these sports to attract student athletes in coming years, particularly given cuts in these athletic programs at several regional schools. The college also expects the growth of two graduate programs - education and professional accounting - to stabilize enrollment over time. Early indications for fall 2011, including the number of applications received to-date, point to improvements in traditional recruiting that will be crucial to sustaining the enrollment growth achieved in fall 2010. Fitch views these positive enrollment indicators, which also point to an ability to increase the student-generated revenues on which the college is heavily reliant, as the basis of the Stable Outlook. Any inability to sustain improved enrollment levels, and thus grow related, student-generated revenues, will have a negative ratings impact.

Management at the college experienced significant changes over the past three years including a new president in March 2010, who immediately set about making necessary changes at the college. The president initiated the planning process for a three-year financial turnaround, which included an early retirement plan for faculty to reduce expenses. The plan, available to 32 faculty members, was accepted by 19. The college also brought in a new director of admissions, who is being aided by an outside consultant to address the college's history of enrollment issues and weak market position. In addition, a new vice president for student development and a chief academic officer have been brought on board to improve students' education and experience at Midland. Finally, the college has appointed a new director of development to improve Midland's fundraising capabilities.

Midland Lutheran College, which was rebranded Midland University in 2010, is a private, co-educational liberal arts college located in Fremont, Nebraska, approximately 35 miles northwest of Omaha. The college primarily serves undergraduate students, but added masters programs in education and professional accounting in fall 2009. Midland is affiliated with the Evangelical Lutheran Church in America.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Midland University.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

'College and University Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

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